Investment Bonds set to benefit from super reforms

24 January 2017

Publication: The Australian Financial Review
Author: Sally Patten
23 January 2017

Investment bonds set to win from super reforms 

Wealthy savers may be howling from the superannuation reforms set to be introduced in July.
But financial advisers and accountants, whose services are in high demand as clients try to navigate the tougher regulatory regime, are not – and neither are manufacturers of alternative tax-effective products.

Take the insurance bond sector. Insurance, or investment bonds, have gone nowhere for years, having been frozen out by the far more generous tax breaks offered on super. But that is potentially all set to change.

Insurance bonds are managed funds where the earnings are taxed internally by the fund at the 30 per cent corporate rate. After 10 years withdrawals are tax free, assuming certain criteria are met, and the proceeds can be paid directly to nominated beneficiaries, bypassing the estate. The underlying investments include Australian shares, overseas shares, cash and bonds. The products are typically used by individuals who want a medium-term savings plan, say to pay for education fees, and so do not want their money tied up until they are 55 or 60. They are also a useful estate planning tool. But for taxpayers on the top marginal rate, they could be a reasonable alternative to super, particularly as annual contributions limits fall and retirees will be prevented from keeping large sums in the super system when a spouse dies.

The insurance market is tiny, valued at $7 billion as of September last year, only about $300 million more than it was four years earlier, according to research firm Plan for Life.

But the market may be less tiny in a couple of years’ time as high-end savers look to diversify their tax structures.

Research firm DEXX&R predicts that between July 2017 and July 2018, an extra $18 billion will flow into fund managers outside super, including those that manage insurance bonds.

“Life companies and fund managers stand to benefit from renewed interest in tax advantaged ordinary insurance bonds, particularly from those on higher incomes with a marginal tax rate in excess of the tax rate applying to life companies. Any reduction in the company tax rate that applies to life company products will increase the tax advantage offered by these products,” DEXX&R notes in a report.

Renato Mota, group general manager of wealth management at IOOF, is particularly bullish, predicting the market could reach between $12 billion and $15 billion within three years. He argued savers would rush to exploit the current super contributions caps ahead of the changes on July 1, but thereafter people would be looking for tax-effective alternatives.